22 Audits, Controls & Reconciliation Practice Questions & Answers

1. 1. What is the primary purpose of a system of internal control over payroll?

   • A.To ensure payroll transactions are authorized, accurate and properly recorded✓ Answer
   • B.To guarantee that no payroll error or fraud can ever occur anywhere in the company
   • C.To shift responsibility for payroll accuracy to the outside accounting firm
   • D.To remove the need for management to review the payroll output reports

   Internal control is a process designed to give reasonable, not absolute, assurance that transactions are authorized, processed accurately, recorded properly and that assets are safeguarded. No control system can guarantee that error or fraud will never happen, controls support management review rather than replace it, and responsibility for payroll accuracy always stays with the employer.

   Source: COSO Internal Control—Integrated FrameworkReport a problem with this question

2. 2. Why should the person who adds a new employee to the payroll master file not also be the person who releases the payroll payments?

   • A.Master file records may be keyed only by human resources staff, never payroll
   • B.One person could then create a fictitious employee and collect that pay✓ Answer
   • C.Payroll payments may be released only by an officer of the organization
   • D.A payroll system cannot process a master file change and a payment together

   Segregation of duties means that no single person controls a transaction from origination to payment. Someone who can both create a master file record and release the money can invent a ghost employee and take the pay, so master file maintenance, payroll approval and payment distribution are assigned to different people.

   Source: COSO Internal Control—Integrated Framework (segregation of duties)Report a problem with this question

3. 3. A two-person payroll department cannot fully segregate duties. Which compensating control is most appropriate?

   • A.Granting both clerks full system access so either can finish any task
   • B.Reviewing the payroll register and every master file change report independently✓ Answer
   • C.Processing payroll less often so that fewer transactions need review
   • D.Approving only the payments above a set dollar amount each pay period

   When headcount makes full segregation impossible, the accepted compensating control is independent review: a manager outside the process examines the payroll register and the report of every master file change each cycle. Oversight is restored without adding staff, while broader access or fewer pay runs would weaken control further.

   Source: COSO Internal Control—Integrated Framework (management review activities)Report a problem with this question

4. 4. Which procedure is the best detective control for a ghost employee on the payroll?

   • A.Distributing paychecks in person once, by someone outside payroll✓ Answer
   • B.Requiring each new hire to complete Form W-4 before the first payroll
   • C.Proving that gross pay minus total deductions equals net pay each run
   • D.Comparing this period's gross wages with the prior period's gross wages

   A ghost employee exists only in the records, so the control that exposes it forces a live person to claim the pay. A one-time physical payout handled by someone outside the payroll department leaves the ghost's check unclaimed, which is why that check and the unclaimed wage listing are the classic evidence.

   Source: Association of Certified Fraud Examiners, Fraud Examiners Manual (payroll schemes)Report a problem with this question

5. 5. Which control most directly prevents payment for hours that were never worked?

   • A.A system edit rejecting records with no cost center code
   • B.A reconciliation of register totals to the funding file
   • C.A signed direct deposit authorization from each employee
   • D.A supervisor's approval of the time records before processing✓ Answer

   Approval by a supervisor who has independent knowledge of the hours actually worked is a preventive control applied to payroll input before the pay is calculated. The other choices either test data completeness or reconcile output, so they cannot tell a real hour from an inflated one.

   Source: COSO Internal Control—Integrated Framework (authorization and approval activities)Report a problem with this question

6. 6. A payroll clerk raises her own pay rate in the system. Which control is most likely to reveal it?

   • A.A recalculation of gross-to-net pay for sampled employees
   • B.A confirmation that the quarterly returns match the annual totals
   • C.A review of the master file change report by another person✓ Answer
   • D.A comparison of the hours entered with the hours accepted

   Every addition or change to a master file record should write an audit trail entry that appears on a change report reviewed by someone who cannot make changes. A self-approved rate increase is invisible in payroll totals and in gross-to-net math, but it stands out on that report.

   Source: COSO Internal Control—Integrated Framework (audit trail over master data)Report a problem with this question

7. 7. Which review best detects several employees' net pay being routed to one account controlled by a fraudster?

   • A.A periodic scan of the master file for duplicate bank accounts✓ Answer
   • B.A requirement that each enrollment include a voided check
   • C.A comparison of total net pay with the amount funded to the bank
   • D.A prenote sent to the bank before the first live direct deposit

   When one person diverts the pay of several employees, the signature of the scheme is the same deposit account, address or Social Security number appearing on more than one master file record, which a periodic duplicate scan surfaces. A prenote proves only that the account exists, not that it belongs to that employee, and the funding total still balances because the money was paid.

   Source: Association of Certified Fraud Examiners, Fraud Examiners Manual (payroll schemes)Report a problem with this question

8. 8. Which control is designed to detect a duplicate payment to the same employee in one payroll run?

   • A.An annual review of wages left unclaimed by former employees
   • B.A positive pay file transmitted to the disbursement bank
   • C.A hash total of employee numbers taken before and after processing
   • D.An exception report of employees paid twice in one period✓ Answer

   Duplicate payments usually come from a manually re-keyed one-time payment or from a batch processed twice, and they are found after the fact by an exception report that flags any employee with more than one payment in the period. Hash totals confirm that a batch arrived intact but would not question a genuine second record.

   Source: COSO Internal Control—Integrated Framework (exception reporting)Report a problem with this question

9. 9. Which practice best supports control over access to the payroll system?

   • A.Full access for every payroll employee, with activity logged
   • B.Access granted by job role and removed when duties change✓ Answer
   • C.Shared logins in payroll so work continues during absences
   • D.A master password held by the manager for urgent payments

   Access should follow least privilege: rights are granted only for what the job role requires and are revoked promptly on transfer or termination. Shared logins and master passwords destroy accountability because system activity can no longer be traced back to one identifiable person.

   Source: COSO Internal Control—Integrated Framework (general controls over technology)Report a problem with this question

10. 10. What makes a payroll audit trail adequate?

    • A.It keeps the signed register locked up for the retention period
    • B.It records the date of the off-site backup of each payroll data file
    • C.It traces each amount from source document to register, ledger and return✓ Answer
    • D.It lists gross and net totals for every pay period of the year

    An audit trail is adequate when an independent reviewer can follow any single amount forward and backward without a break in the chain, from the source document through system input and the payroll register to the general ledger entry and the filed return. Storage, summary listings and backup logs do not by themselves link one transaction to its record.

    Source: 26 CFR 31.6001-1 (records of employment taxes)Report a problem with this question

11. 11. The monthly reconciliation of the payroll bank account is an example of which type of control?

    • A.A preventive control
    • B.A compensating control
    • C.A detective control✓ Answer
    • D.A directive control

    Detective controls identify errors or irregularities after a transaction has been processed. Reconciliations, variance and exception reports and audits are detective, while approvals, system edits and access restrictions are preventive because they act before the transaction is accepted.

    Source: COSO Internal Control—Integrated Framework (types of control activities)Report a problem with this question

12. 12. Which of the following is a corrective control?

    • A.Restricting master file update rights to authorized staff
    • B.Reissuing a correct payment after an underpayment is found✓ Answer
    • C.Reviewing an exception report of negative net pay each period
    • D.Requiring two approvals before an off-cycle payment is released

    A corrective control acts after a detective control has found a problem: it repairs the error, makes the employee whole and adjusts the records so the same condition does not persist. Requiring approvals and limiting access are preventive, and reviewing an exception report is detective.

    Source: COSO Internal Control—Integrated Framework (types of control activities)Report a problem with this question

13. 13. The payroll register totals do not agree with the amounts posted to the general ledger. What is the most likely cause?

    • A.Employees changed their withholding elections during the period
    • B.The pay period ended on a day other than the deposit due date
    • C.A manual or off-cycle payment bypassed the ledger interface✓ Answer
    • D.The employer reports on a fiscal year and not a calendar year

    The register and the ledger disagree when money moved outside the normal interface: a manual check, an off-cycle run, or a void or reissue that was never posted. Withholding changes, deposit timing and the choice of fiscal year change the amounts reported but not the agreement between two records of the same payroll.

    Source: COSO Internal Control—Integrated Framework (reconciliations)Report a problem with this question

14. 14. A payroll interface to the general ledger is out of balance by a small amount. What is the correct response?

    • A.Ignore any variance below the company's materiality level
    • B.Research the difference and clear it with a documented entry✓ Answer
    • C.Wait for the difference to reverse itself in the next period
    • D.Post the difference to a suspense account and close the period

    A reconciliation is complete only when every difference has been explained, so the practitioner researches the cause and clears it with a documented adjusting entry. Plugging the amount to a suspense account, waiving it as immaterial or waiting for it to reverse hides an underlying error that will usually repeat.

    Source: COSO Internal Control—Integrated Framework (reconciliations)Report a problem with this question

15. 15. In reconciling the four quarterly federal employment tax returns to the annual wage statements, which totals must agree?

    • A.The gross pay in the register and the net pay funded to the bank
    • B.The FUTA taxable wages and the wages reported to the state agency
    • C.The withheld federal income tax and the Social Security and Medicare wages✓ Answer
    • D.The employee headcount and the number of wage statements issued

    Publication 15 directs employers to reconcile the amounts reported on the quarterly employment tax returns with the annual wage statements filed for employees. Federal income tax withheld and Social Security and Medicare wages and taxes must agree in total for the year, and unexplained differences prompt contact from the IRS or the Social Security Administration.

    Source: IRS Publication 15 (Circular E), reconciling wage reporting forms with employment tax returnsReport a problem with this question

16. 16. Which reconciliation would reveal that retirement plan deferrals were withheld from pay but never remitted?

    • A.The net pay file compared with the amount funded to the bank
    • B.The register gross pay compared with wage expense in the ledger
    • C.The deduction totals compared with the plan trustee's report✓ Answer
    • D.The time system hours compared with the hours payroll accepted

    Deferrals withheld from pay are participant money that the employer holds and must forward to the plan, so only a comparison with the trustee's or vendor's own record proves that it arrived. The internal reconciliations listed prove only that the amount was withheld and funded, not that the third party received it.

    Source: 29 CFR 2510.3-102 (participant contributions are plan assets)Report a problem with this question

17. 17. After every deposit for the period has been made, a balance remains in the federal income tax withholding liability account. This most likely means that:

    • A.The deposit was missed or posted to the wrong account✓ Answer
    • B.The employer must move from monthly to semiweekly deposits
    • C.The employer overfunded its net payroll for the period
    • D.The employees asked for more withholding than the tables give

    A withholding liability account records money owed to the taxing authority and should clear to zero once the related deposits are made. A residual or ageing balance points to a missed or short deposit, or to an amount posted to the wrong account, and it must be researched rather than carried forward.

    Source: IRS Publication 15 (Circular E), depositing federal employment taxesReport a problem with this question

18. 18. Until they are deposited, amounts withheld from employees' wages for federal income tax are, in the employer's books:

    • A.a reduction of the employer's own payroll tax expense
    • B.an asset, since the cash stays with the employer until deposit
    • C.a liability, since the funds are held for a third party✓ Answer
    • D.an expense, since the amount arises from paying the workforce

    Withheld tax is never the employer's money. It is collected from the employee and held in a special fund in trust for the government, so it is carried as a liability from the moment of withholding until the deposit extinguishes it. Only the employer's own share of taxes is an expense of the business.

    Source: Internal Revenue Code §7501 (withheld taxes held in trust for the United States)Report a problem with this question

19. 19. The employer's own share of Social Security and Medicare tax is best described as:

    • A.a liability only, because it is collected for the employees
    • B.an expense of the employee that the employer merely forwards
    • C.neither expense nor liability, since it offsets withholding
    • D.an expense of the employer and a liability until it is deposited✓ Answer

    The matching share is a tax imposed on the employer itself, so it is a genuine cost of employing people and belongs in expense for the period the wages were earned. Because it is owed to the government but not yet paid, the same amount also sits as a liability until the deposit is made.

    Source: Internal Revenue Code §3111 (employer tax on wages)Report a problem with this question

20. 20. Employees have worked days at period end that will be paid in the next period. Why does the employer record an accrual?

    • A.To report the wage expense in the period the work was done✓ Answer
    • B.To move the tax deposit obligation into the following period
    • C.To keep the payroll records on the cash basis for the year
    • D.To allow the payment to be issued before the scheduled payday

    The matching principle requires an expense to be recognized in the period in which the work was performed rather than the period in which the cash is paid, so wages earned before the close are accrued as an expense and as a liability. The accrual is a financial reporting entry and does not change when the tax deposit is due, which follows the date the wages are actually paid.

    Source: FASB Accounting Standards Codification Topic 710, Compensation—GeneralReport a problem with this question

21. 21. A period-end wage accrual is reversed at the start of the next period so that:

    • A.the accrued wages move from the income statement to the balance sheet
    • B.the employer's deposit obligation for that period is reduced
    • C.the employer's share of taxes on the accrued wages is recorded
    • D.the same expense is not counted twice when the payroll is paid✓ Answer

    The reversing entry is the exact opposite of the accrual and is posted on the first day of the following period. When the full payroll is later recorded at its normal gross amount, the portion already recognized at period end is not expensed a second time, so the year's total expense stays correct.

    Source: FASB Accounting Standards Codification Topic 710, Compensation—GeneralReport a problem with this question

22. 22. An employer is notified of a federal employment tax examination. What is the payroll department's primary responsibility?

    • A.To produce the records supporting reported wages, taxes and deposits✓ Answer
    • B.To discard records older than the required retention period
    • C.To answer the examiner's questions without involving management
    • D.To amend the prior returns before the examiner begins work

    In an agency examination the payroll department produces a complete audit trail supporting the wages, taxes and deposits reported. Employment tax records must be kept at least four years after the tax is due or paid, whichever is later, no records are destroyed while an examination is pending, and amended filings and all communication go through management and the channels the employer has defined.

    Source: 26 CFR 31.6001-1; IRS Publication 15 (Circular E)Report a problem with this question

Practice questions based on the PayrollOrg Fundamental Payroll Certification content outline and on federal payroll authorities including IRS Publication 15 (Circular E), Publication 15-A, Publication 15-B, the Fair Labor Standards Act, and the Consumer Credit Protection Act. FPC and CPP are marks of PayrollOrg; this site is not affiliated with or endorsed by PayrollOrg. Amounts that are adjusted each year — wage bases, contribution limits, the minimum wage, mileage and per-diem rates — are given inside the question rather than tested from memory, and state-specific rules are out of scope. Confirm the current content outline and the current-year figures from the official sources before testing. About the FPC exam →